African incomes are rising, and consumer and business spending is vibrant — but the continent’s manufacturers are still not taking advantage of dynamic home and regional markets. This is a large lost opportunity.
New research from the McKinsey Global Institute finds that Africa could nearly double manufacturing output in less than 10 years, creating as many as 14-million wage-paying jobs.
Overall, African economies have underperformed. Value added from manufacturing increased at a rate of 2.5% a year between 2000 and 2015, far weaker than Asia’s 7.4%. Today’s $500bn of output is heavily concentrated in five countries: Egypt, Morocco, Nigeria, SA and Tunisia. And manufacturers sell comparatively little to the rest of Africa — just 10%.
But Africa could nearly double its output to an estimated $930m in 2025 — manufacturing output would grow at 6.4% a year, triple the rate achieved since 2000. Three-quarters of the opportunity to boost manufacturing comes from serving home markets — producing at home more of what Africa currently needs.
Africa imports a third of the food, beverages and similar processed goods it consumes. By contrast, member states of the Association of Southeast Asian Nations (Asean) import about 20% of such goods from outside their region, and the South American countries in the Mercosur trade bloc import about 10%.
Africa has the raw materials to make cement in abundance, and yet it imports 15% of its needs compared with 5% in the case of Asean and Mercosur.
Yet consumer and business spending is growing robustly. African consumers and businesses already spend $4-trillion a year. By 2025, that will rise to $5.6-trillion.
Consumption by households is expected to grow at nearly 4% a year to $2.1-trillion.
Business spending is set to grow from $2.6-trillion to $3.5-trillion. That means rising demand for manufactured goods from processed food and beverages to plastics, appliances, cars and trucks, construction materials, fuel and industrial inputs.
Of the $430bn additional manufacturing output McKinsey believes is possible, up to $209bn could come from a category called “global innovations for local markets” that includes motor vehicles and chemicals, where research and development is a key component, and which already accounted for 27% of African output in 2015.
The regional processing of goods such as food and beverages, with the largest share of manufacturing today at 38%, could add as much as $122bn.
Resource-intensive manufacturing of cement and petroleum products could contribute another $72bn of additional output, and labour-intensive manufacturing of such products as apparel and footwear the remaining $27bn.
Such a step change in manufacturing in Africa is, without doubt, achievable. A number of successful industrial clusters have already emerged over the past 10 years, including Ethiopia’s apparel and footwear sector and Morocco’s automotive and aerospace industries. The challenge is to create more such success stories.
It won’t be easy — and it won’t be on low labour costs alone. For both domestic and export opportunities, African countries need to address overall productivity and cost competitiveness.
Ethiopia’s success in apparel and footwear has been due to its low unit labour costs. So it is able to manufacture a polo shirt for $0.14, less than half the cost in China and Vietnam, and leather loafers for one-third the unit cost of Vietnam and one-fifth the unit cost in China.
Ethiopia’s experience demonstrates the need to act on a broad front to improve the competitiveness of African manufacturing.
One helpful export lever is the African Growth and Opportunity Act trade agreement between the US and about 40 sub-Saharan African nations.
McKinsey’s research shows this agreement could reduce the cost of African goods imported into the US by up to 50%. But few countries fully exploit this opportunity.
To make the opportunity a reality will require African companies to improve their productivity and competitiveness and build scale. To enable them to do so, Africa’s governments need to weigh in with an aggressive agenda to enable African businesses to step up their performance.
Although Africa’s business environment has improved in the past two decades, even this year the World Bank put only seven African countries in the top half of its Doing Business ranking.
To improve the productivity of corporate Africa, governments need to ensure that the basics of reliable power supply, logistics, and available industrial land are in place.
They can enable the growth of markets by using political engagement and trade agreements to deepen regional trade and remove non-tariff constraints. They can also market African production capabilities, bolster agencies to promote investment, and develop special economic zones.
The rewards of accelerated industrialisation would be immense, transforming wealth, tax receipts, productivity and skills, and the balance of payments, and creating millions of jobs.
Africa has its manufacturing success stories, but they remain too few and far between. Now is the time to put that right.
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